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The voluntary carbon market saw demand increase significantly between 2016 and 2021, buoyed by an increase in corporate net-zero commitments and targets. Demand has stalled in the years since, following increased scrutiny around project integrity and quality, but moves by the market to address some of these concerns have led to a recovery in demand to record levels.
Retirements of voluntary carbon credits rose from around 31 million tCO2e in 2016 to just over 160 million tCO2e in 2021 across the four main registries (Verra, Gold Standard, ACR and CAR). But demand eased slightly to 154 million tCO2e in 2022 before rising to a record 163 million tCO2e in 2023. The market looks to be continuing this trend of recovering demand this year, with 2024 retirements at 137 million tCO2e as of late November and around 10 million tCO2e higher than a year earlier. Corporate demand typically ends the year on a high note, as end users look to balance their end-of-year carbon accounting and meet their sustainability targets, with December seeing the highest monthly retirements each year since at least 2020. Without including the last week of November data, December retirements would need to be around 75% of 2023 levels for overall retirements to again set a record.
The market has looked to address the integrity and quality concerns raised over the past years through a variety of initiatives. Independent governance bodies have emerged, such as the Integrity Council for the Voluntary Carbon Market (IC-VCM) which was created in 2021 and looks to set a definitive global threshold for high-quality carbon credits with its core carbon principles (CCP) tag. The first CCP-approved carbon-crediting methodologies were announced in June this year and included landfill gas and ozone-depleting substances projects. Since then, existing renewable energy methodologies have been rejected, while certain REDD+ methodologies were approved in November. As part of this, we have seen some standards update or release new versions of their methodologies in an attempt to align with the CCPs.
Some companies have also looked to industry schemes such as CORSIA to provide an initial quality cut, while ratings agencies have become more prominent, providing independent ratings to projects in a bid to drive greater transparency and quality.
Despite retirements reaching record levels last year, the market as a whole is oversupplied because issuances remain higher than retirements across all project types year on year. The growth in this oversupply has eased in recent years, with issuances outweighing retirements by 200 million tCO2e in 2021 before falling below 100 million tCO2e in both 2023 and 2024 so far. This lower oversupply growth rate has been caused by an almost 30% drop in credits issued between 2021 and 2023 to 260 million tCO2e from 365 million tCO2e. A sharp drop in credit pricing, particularly for avoidance credits, weighed on the market with some project developers delaying credit issuances.
But despite this, over 960 million tCO2e of issued unretired credits are currently circulating across all vintages. It remains to be seen how the market deals with these currently circulating credits, particularly from either earlier vintage credits or credits from projects perceived as lower quality. Around 180 million tCO2e of these remaining credits are from vintage 2015 or earlier and predate the Paris Agreement (pre-Paris). Meanwhile, close to a third are from renewable energy projects, which as we mentioned earlier recently failed to gain CCP approval.
REDD+ credits make up around a further third of issued, unretired supply, of which we will talk about in more detail in another article.
The vast majority of these currently circulating credits are from projects that reduce or avoid carbon emissions, with only around 3% made up of those that remove carbon from the atmosphere. At the same time, demand for removal credits has been firm with 2024 retirements already above whole-year 2023 levels, leaving that part of the market much tighter.
The largest bulk of retirements this year has been credits from Agriculture, Forestry or Other Land Use (AFOLU) projects, which totalled over 51 million tCO2e or around 37%. Within this segment REDD+ is the largest project-type, accounting for around 34 million tCO2e, and around 4 million tCO2e higher than the same time last year. REDD+ demand has steadily improved over the past few years as the segment recovered from media reports about overcrediting and project integrity. REDD+ demand peaked at nearly 61 million tCO2e in 2021 before falling over 40% to around 34 million tCO2e in 2022. Demand reached around 47 million tCO2e last year following a particularly strong December that saw over 15 million REDD+ credits retired. Part of that strong recovery last year was driven by large retirements by Shell, including around 12 million tCO2e of REDD+ credits in November and December 2023.
The second largest segment is renewable energy, which accounts for around 29% of total retirements this year, slightly down from last year’s 33% share. The project category as whole has suffered from historical additionality concerns, which eventually saw Verra and Gold Standard change methodologies to only allow new projects located in Least Developed Countries (LDCs). Typically, projects located within these countries have attracted a premium to those in other countries.
Credits from cookstove projects have seen a sharp rise in demand in recent years, with retirements rising from less than 4.5 million tCO2e in 2020 to close to 20 million tCO2e in 2024. Part of this increase can be attributed to the surge in new cookstove projects being registered, with issuances rising from 7.5 million tCO2e to around 45 million tCO2e over the same period. However, it should be noted that around 5 million tCO2e of this year’s “retirements” come in the form of cancellations of overissued credits from C-Quest Capital cookstoves projects in October, slightly inflating demand figures for this year.
Demand for avoidance credits will continue to provide the majority of voluntary carbon credit demand in the near-term, partly owing to the greater supply of these credits. Price-conscience buyers are likely to be less picky around what credits they source, but overall there is a move toward higher integrity projects. On top of this, avoidance credits, such as REDD+ and cookstoves, can also carry many co-benefits in addition to the reduced carbon emissions, attracting interest from buyers.
Interest in carbon dioxide removal credits has been growing both from nature and tech-based solutions. Given limited circulating supply of these credits, some companies have been securing long-term offtake agreements to ensure their supply of these credits in the years ahead. Earlier this year, BTG Pactual Timberland Investment Group signed agreements with both Meta and Microsoft for the delivery of multi-million tCO2e of nature-based removal credits through to 2038 and 2043 respectively. Interest in tech-based permanent carbon dioxide removals (CDRs) has also been increasing, with a growing number of multi-year forward purchase agreements made. A lot of this demand data is yet to appear in registry figures with many of these projects still in early development, while some of the methodologies for these project types have also yet to be finalized.
Only around 27 million tCO2e of credits have currently been CCP-approved, but as more methodologies get approved over the coming months and projects issue credits under approved methodologies this pool will steadily grow. Project developers will likely look toward achieving price premiums for CCP credits, but the pool of currently approved credits has not been wide enough to test if end buyers will look to the standard as a baseline for their demand.
Demand from airlines is expected to pick up in the coming years as they look to meet their CORSIA commitments but there is still some uncertainty around when significant demand could emerge. The scheme is currently in its first phase which runs from 2024 to 2026, but airlines have until January 31, 2028, to retire CORSIA Eligible Emissions Units (EEUs). Supply of currently qualifying credits is very slim, with just 7.1 million tCO2e of issued credits from one Jurisdictional REDD (J-REDD) project in Guyana (ART 102) meeting requirements. CORSIA EEUs must be from a registry/standard approved by the International Civil Aviation Organisation (ICAO), issued from projects that started their first crediting period from 2016, have a vintage of 2021-2026 and have had a corresponding adjustment applied.
Corresponding adjustments are a mechanism to avoid double counting of the emissions reduction or removal under Article 6 of the Paris Agreement. These are granted by the host country which will remove the emissions unit from their own Nationally Determined Contributions (NDCs).
ICAO approved Verra, Gold Standard and CAR in November, adding to the already approved ACR and Architecture for REDD+ Transactions (ART) registries, opening the way for increased supply of CORSIA EEUs. But the timeframe for qualifying credits from these registries to be tagged CORSIA Phase 1 eligible is likely to be relatively slow because of the need to protect against corresponding adjustment revocation risk.